Gold losing appeal for investors stepping back from rally bet

Hedge funds and other speculators cut their wagers on a bullion rally for the fourth time in five weeks. As traders tire, the metal's 30-day historical volatility has dropped to the lowest since November. Open interest is also on the decline.

After stunning gains to start the year, bullion has started to lose its momentum. Prices are down about one per cent in August as the US economy picks up steam, damping demand for a haven. American payrolls surged in July and wages climbed, pointing to renewed optimism that the jobs market will sustain consumer spending in the second half of 2016.

"People don't believe in the gold rally," said Frank Holmes, who oversees about US$700 million as chief executive officer of US Global Investors in San Antonio, Texas.

"You can see this last dip in gold, the employment numbers are so good. When there is good economic data out, rates rise and the price of gold goes down."

The net-long position in gold futures and options fell 4.3 per cent to 255,773 contracts in the week ended Aug 9, according to Commodity Futures Trading Commission data released three days later. The holdings have drop 11 per cent since July 5, when they reached an all-time high of 286,921.

Bullion has retreated 2.5 per cent since reaching a two-year high on July 6 on the Comex in New York to settle at US$1,343.20 an ounce on Friday. Open interest, a tally of outstanding contracts in Comex futures, has slumped 13 per cent since touching a July peak.

Interest in gold has diminished as equity markets took off. The Standard & Poor's 500 Index of shares reached a fresh all-time high last week. Assets in SPDR Gold Shares, the world's biggest exchange-traded product backed by the metal, have declined in three of the past five weeks.

US jobless claims have been holding near four-decade lows, highlight strength in the job market that signals the economy would probably be resilient in the face of interest-rate increases by the Federal Reserve. Higher rates cut the appeal of gold, which doesn't pay interest or offer dividends like assets such as bonds or equities. Traders are betting that there's a 42 per cent chance the Fed will raise rates by the end of the year, up from 12 per cent at the start of July.

A probable trio of rate hikes from the Fed through to the end of 2017 means there's little room for it to rally further from near a two-year high, according to Pictet Wealth Management. Bullion isn't likely to break higher than US$1,430, and may stabilise around US$1,250 to US$1,300, said Luc Luyet, a currencies strategist at the wealth-management arm of the Pictet Group, which managed 401 billion euros (S$602 billion) as of Dec 31.

The recent step back from gold is a change of course for investors who were stocking up on bullion earlier this year. Funds have been betting on price gains since they turned net-long on the metal in January, and prices are still up 27 per cent this year. Global holdings in bullion ETPs reached a three-year high last week.

Prices did stage a short-lived comeback Friday following the release of disappointing US data that weakened the case for more rate increases.

And outside the US, the growth picture isn't rosy. The Bank of England continued its second week of bond purchases after cutting interest rates for the first time in seven years, boosting the outlook for more stimulus from one of the world's biggest economies. Japan and Europe also continue to embrace measures to support the economy. Bullion reached a record in 2011 amid unprecedented stimulus from the world's central banks.

People will be drawn back to gold "when the ammunition of central banks is hard to find," said Vic Sperandeo, the Dallas-based chief executive officer of EAM Partners, which oversees US$3 billion.

"They can't lower rates, even now the Bank of England shows it can't do more QE because there's no bonds available, so what do you buy? You buy gold."